Abstract

No region of the United States fared worse over the postwar period than the “Rust Belt,” the heavy manufacturing region bordering the Great Lakes. This paper hypothesizes that the Rust Belt declined in large part due to the persistent labor market conflict which was prevalent throughout the Rust Belt’s main industries. We formalize this thesis in a two-region dynamic general equilibrium model in which labor market conflict leads to a hold-up problem in the Rust Belt that reduces investment and productivity growth and leads employment to move from the Rust Belt to the rest of the country. Quantitatively, the model accounts for much of the large secular decline in the Rust Belt’s employment share before the 1980s, and its relative stabilization since then, once labor conflict decreased. The model also includes a foreign sector to assess the alternative hypothesis that higher imports were behind the Rust Belt’s decline. This hypothesis is inconsistent with the timing of the Rust Belt’s decline.